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COMMODITIES: Oil Market Needs Supply Cut of Four Million Barrels

Estrella Gutierrez

CARACAS, Dec 23 1998 (IPS) - The Venezuelan government believes that only a supply cutback of four million barrels a day could shore up slumping petroleum prices, and predicts that 1999 will be another hard year for oil producers.

Deputy Minister of Energy Dolores Dobarro said benchmark prices would remain next year at an average of six to seven dollars below 1996 prices – similar to this year’s performance.

Dobarro said that projection could be changed only by an agreement among producers for an additional supply reduction of close to one million barrels per day (bpd), which would bring the total supply cut – including cutbacks already agreed – up to four million bpd.

Petroleum is closing the year with prices at a 22-year low, which in the case of Venezuela’s export cocktail means a price of less than 10 dollars a barrel, and a six to seven-billion dollar fall in revenues from 1997.

Spot and futures prices hit a low this week after the suspension of U.S.-British attacks against Iraq, which removed the possibility of a cut in the flow of Gulf crude due to the crisis.

Benchmark Brent Crude for delivery in February fell for the second day in a row Tuesday to 9.75 dollars a barrel – only comparable, in terms of spot prices, to 1986 levels.

The price of Brent Crude averaged at slightly over 12 dollars this year, down from 19 dollars in 1997.

Venezuela is the world’s third largest exporter of crude, with a total production of 2.95 million bpd, and the only country in the Americas that forms part of the Organisation of Petroleum Exporting Countries (OPEC).

The 11 members of OPEC agreed in March and June to reduce their supply to the market by 2.6 million bpd, which a number of independent producers, led by Mexico, joined with their own collective supply cut of 500,000 bpd.

But demand has held steady at slightly more than 75 million bpd, and Dobarro maintained that exporters must implement an additional cutback of one million bpd in order to keep offer at that level, and as the only way to drive prices back up.

Estimates by the government-owned oil company, Petroleos de Venezuela (PDVSA), indicate that two million bpd above the level of demand are pumped onto the market. That overproduction has kept stockpiles at above seven billion barrels, equivalent to more than 90 days of consumption.

Dobarro admitted that Venezuela had not totally lived up to its pledge of reducing supply by 525,000 bpd. While she did not provide precise figures, other sources agree that Venezuela has only withdrawn 400,000 bpd from the market.

“There are several countries that have not complied with the targets,” said Dobarro, while insisting that only a four million bpd supply cutback would effectively shore up prices.

Venezuelan president-elect Hugo Chavez reiterated this week on a brief visit to Mexico that as of January his country would strictly live up to the agreed cutback, which would be extended throughout the whole year.

That commitment was formalised by both out-going and designated officials at a Dec. 17 ministerial meeting among the members of the Riyadh Pact – Venezuela, Saudi Arabia and Mexico – in Madrid.

Since March, the three members of the Pact have sponsored the unprecedented supply cut accord between OPEC and non-OPEC exporters – which was only successful in stabilising price fluctuations for brief periods.

OPEC only produces around 27 million bpd of the 77 million produced worldwide. For that reason, Venezuela and the other partners say any isolated effort of new cutbacks would be useless, because other exporters would fill the resultant gap.

“Low prices are on the horizon, and it is better to act based on that outlook,” PDVSA president Luis Giusti said Dec. 14.

Expert in petroleum issues Alberto Quiros underscored another problem that overlapped that of the crash in prices, and has even worse effects for producers – the volatility of the market, where prices rise and fall at roller-coaster speed, making any planning by the oil industry and exporting countries virtually impossible.

Venezuela, for example, had to modify its budget three times this year, finally basing it on a price of 11.5 dollars a barrel, even though the average price will be around 10 dollars, after the last plunge seen this month.

Finance Minister Maritza Izaguirre said this week that her advice for the Chavez administration, which takes office on Feb. 2, will be to calculate 1999 revenues based on a price per barrel between nine and 10 dollars.

In 1998, petroleum contributions to state coffers fell 43 percent, which translated into a five-billion dollar deficit – equivalent to five percent of gross domestic product – and a 0.7 percent contraction of the economy according to local authorities (2.5 percent according to the International Monetary Fund).

Venezuela depends on oil for more than 50 percent of its fiscal revenues and upwards of 80 percent of its foreign exchange earnings.

OPEC members have suffered a more than 60-billion dollar combined drop in revenues this year, compared to 170 billion taken in through oil sales in 1997.

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